Fed's Fischer: 'Good Reason' to Think U.S. Inflation Will Move Higher -- 2nd Update
August 29 2015 - 4:42PM
Dow Jones News
By Ben Leubsdorf
JACKSON HOLE, Wyo.--The Federal Reserve's No. 2 official said
there is "good reason" to think sluggish U.S. inflation will firm
and move back toward the U.S. central bank's 2% annual target,
touching on a significant assessment facing the Fed ahead of its
September policy meeting.
"Given the apparent stability of inflation expectations, there
is good reason to believe that inflation will move higher as the
forces holding inflation down--oil prices and import prices,
particularly--dissipate further," Fed Vice Chairman Stanley Fischer
said Saturday at the Federal Reserve Bank of Kansas City's annual
economic symposium.
In its last policy statement, the Fed said its first
interest-rate increase will come after "some further improvement in
the labor market" and when officials are "reasonably confident"
inflation will move back to the central bank's 2% annual target.
Mr. Fischer, speaking less than three weeks before the Fed's Sept.
16-17 meeting, didn't declare whether those conditions had been
fulfilled. "I will not and indeed cannot tell you what decision the
Fed will reach by Sept. 17," he said.
He said the Fed awaits the Labor Department's August jobs report
on Sept. 4. The past three months have seen monthly nonfarm
payrolls growth average 235,000, "well above the amount needed to
continue the strengthening of the labor market," he said.
As for inflation, "with regard to our degree of confidence in
this expectation, we'll need to consider all the available
information, and factors relevant to certainty and uncertainty
about those projections for the economic outlook, before we make
that judgment," he said.
On Friday, Mr. Fischer told CNBC that "it's early to tell" what
the Fed will do at its September meeting. Some policy makers in
recent days have signaled support for beginning to raise short-term
interest rates that have been pinned near zero since December 2008,
while others have said recent financial-market volatility and
worries about China's economy could justify delaying the
long-awaited liftoff.
Mr. Fischer said Saturday that Fed officials are following
"developments in the Chinese economy and their actual and potential
effects on other economies, including and especially the United
States, even more closely than usual." Later, in response to a
questioner who said anticipation of a Fed rate increase was one
factor behind the Chinese stock market's recent decline, he
expressed skepticism. "The stock market went up...when people knew
what our interest-rate policy was, and it collapsed...when they
also knew what our interest-rate policy was, so I'm not quite sure
which part of that might be the influence of the Fed, " he
said.
When the time comes to raise rates, Mr. Fischer said, "we will
most likely need to proceed cautiously" and with inflation low, "we
can probably remove accommodation at a gradual pace. Yet, because
monetary policy influences real activity with a substantial lag, we
should not wait until inflation is back to 2% to begin
tightening."
In his remarks, Mr. Fischer discussed various forces that he
said have restrained U.S. inflation, including declines in energy
prices, softness in non-oil commodity prices, the strengthening of
the dollar and slack in the economy.
Despite improvement in the labor market, "we have seen no clear
evidence of core inflation moving higher over the past few years,"
Mr. Fischer said. "This fact helps drive home one important
point,...that while much evidence points to at least some role for
slack in helping to explain movements in inflation, this influence
is typically estimated to be modest in magnitude, and can easily be
masked by other factors."
The decline in energy prices over the past year "ought to be
largely a one-off event," he said, but he added that it is
"plausible" to think the dollar's rise will restrain output growth
"through 2016 and perhaps into 2017 as well."
An important factor, he said, is that longer-term inflation
expectations "appear to have remained generally stable since the
late 1990s." The Fed, however, should be "cautious in our
assessment that our inflation expectations are remaining stable" in
part because "measures of inflation compensation in the market for
Treasury securities have moved down somewhat since last summer," he
said.
But Mr. Fischer added that "you do need to be wearing your
glasses to see" the decline in a chart, and that such movements
"can be hard to interpret" and "may reflect factors other than
inflation expectations, such as changes in demand for the
unparalleled liquidity of nominal Treasury securities."
Mr. Fischer, the former governor of the Bank of Israel, spoke
Saturday on a panel about inflation dynamics with Bank of England
Gov. Mark Carney, European Central Bank Vice President Vítor
Constâncio and Reserve Bank of India Gov. Raghuram Rajan.
Write to Ben Leubsdorf at ben.leubsdorf@wsj.com
(END) Dow Jones Newswires
August 29, 2015 16:27 ET (20:27 GMT)
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